FNB Corp (FNB) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the F. N. B's. fourth quarter 2003 conference call.

Today's conference call contains forward-looking statements relating to present and/or future trends or factors affecting the banking industry and specifically the financial operations, markets and products of F. N. B. Corporation.

These forward-looking statements involve certain risks and uncertainties. There are a number of important factors that could cause future results to differ materially from historical performance or those projected. These include but are not limited to competitive pressures among depository institutions increasingly significant changes in the interest rate, environment reduced interest margins, prepaid speed, loan sale volumes, charge-off and loan loss provisions, general economic conditions are less favorable than expected.

Legislative or regulatory changes adversely affect the business in which F.N.B. is engaged or changes in security markets. F.N.B. undertakes no obligations to release revisions to these forward-looking statements or reflect events or circumstances after the date of this release.

[Operator Instructions].

It is now my pleasure to turn the floor over to your host Steve Gurgovits. Please. The floor is yours.

Thank you, operator. Good morning, everyone. I would like to extend our sincere appreciation to you for your interest in the F.N.B. Corporation. As the operator mentioned I am Steve Gurgovits, president and chief executive officer of F.N.B.

Before I introduce the other participants, let me make a few comments about the governance of the new F.N.B.

First the board, as you may already know, we added three financial services veterans as new outside directors to our corporate board. They are John Reece, president of McCallen Capital Partners. John Ballantine, retired executive vice president and chief risk management officer of First Chicago NBD and Bob Goldstein, chairman and former CEO of Bay View Capital Corporation.

As we move forward, we are certain to benefit from their council based on their combined experience and knowledge of capital markets. We also have a new senior management team in place, most of whom are new to you. They will be participating in today's call. So before we start, I'm going to ask them to tell you a little bit about themselves. First our new chief financial officer, Brian Lilly.

Brian?

Thank you, Steve. For the 24 years, I have been an (inaudible) professional of financial services industry. During my career, I've been an audit manager at Ernst & Young and I spent 14 years with PNC bank.

At PNC I led the team that designed the internal profit delivery point system that is in use today. I was CFO of a $30 billion retail bank and $500 million revenue asset management business. At F.N.B. in addition to my CFO responsibilities, I provide over-site for risk management, human resources and legal functions. I look forward to meeting and working with many of you who are on the call today.

Thank you, Brian.

Next is Debbie Coull-Cicchini. Debbie is executive vice president of First National Bank of Pennsylvania, in charge of retail banking, wealth management and marketing.

Debbie?

Good morning, everyone. I also have over 20 years of banking experience. Most of my career has been with a large Canadian bank where my responsibilities were to oversee areas of retail banking and wealth management.

During a portion of my career, I also had responsibilities in the small business banking area and strategy development. I have spent the last five years of my career in the US with my most recent role prior to joining F.N.B., being responsible for approximately 160 banking locations in six western states. I'm delighted to be a part of the F.N.B. team.

Thanks, Debbie. And last, but certainly not least, is Gary Roberts, our chief operating officer. Gary?

Thanks, Steve. Good morning, I'm a banker of 36 years experience in the Nebraska, Colorado and Kansas and with F.N.B. Corporation for the last six years. Since 1981, I've served as president and CEO of various banks within the three organizations that I worked for, primarily leading turnarounds. I'm happy to be part of this team. I think we've got a great opportunity ahead of us.

Thanks, Gary. Also on the line with us today is John Waters, F.N.B.'s investor relations' advisor. We're generally excited about this opportunity to report on the Corporation's 2003 results and to share with you our business plans for 2004.

Brian will provide the commentary on the fourth quarter and 2003 results for the Corporation, as it was configured this past fiscal year. He will also provide commentary for the northern operation on a stand-alone basis for the same periods. We believe the latter discussion is valuable because, it provides a good foundation on which to measure our future performance.

As you know, F.N.B. completed the spinoff of its Florida operations on January 1, 2004. That organization is now a stand-alone publicly traded company called First National Bank Shares of Florida. We pursued the spinoff with the expressed purpose of enhancing shareholder value.

We felt the shareholders would benefit by having the companies operate separately with separate strategies. This way, Florida could concentrate on the growth potential in that market and Pennsylvania could concentrate on developing strong earnings than a high dividend while, experiencing steady but more modest growth. I'm happy to report that we have accomplished this objective. Its proof we note the increased market value of the combined stock prices.

Prior to the announcement of the spinoff in July 2003, F.N.B. stock price was $29.48. As of the close of business on Thursday, the combined stock price of F.N.B. and First National Bank Shares of Florida was $36.60. That's a 24% increase in shareholder value to date. F.N.B. Corporation now operates as a $4.6 billion financial services company headquartered at (inaudible), Pennsylvania.

The holding company owns and operates affiliates that serve the needs of individuals and businesses in the areas of banking, wealth management, insurance and consumer finance.

We operate 125 banking offices in western Pennsylvania and eastern Ohio and four insurance agency locations. We offer wealth management services at all of our banking offices and have insurance agents on site at several branch locations. Our consumer finance subsidiary regency has 47 offices throughout Pennsylvania, Ohio and Tennessee.

Following our presentation, we will answer any questions that you may have. Please note in this presentation when we say combined F.N.B., we're including the Florida operations. So, let's begin with the financial results of the combined F.N.B. Corporation for the fourth quarter and all of 2003. Brian?

Thank you, Steve. For the three months ended December 31, 2003, net income for the combined F.N.B. Corporation was $10.3 million or 21 cents per diluted share. As we have discussed in past calls and press releases, the Corporation incurred restructuring charges related to the spinoff of the Florida operation.

In this quarter, these charges totaled $12.5 million on after tax basis or 13 cents per diluted share. If we exclude these expenses, combined F.N.B. earnings were $22.9 million or 49 cents per diluted share, which meets the average of the street's estimates. These results, while lower than the same period a year ago, represent the 5.4% increase over the prior quarter, again excluding the restructuring charges.

Revenues improved slightly this quarter primarily because of improved net interest margin, which increased 10 basis points. This revenue increase was somewhat offset by the seasonally lower fee income from insurance and sale of retail investments, as well as lower gains on the sale of mortgage loans reflected in industry slowdown and residential origination.

We are pleased to note that non-interest expense excluding restructuring charges were $64 million, down $4.2 million or 6% from last quarter. This favorable variance is result of our efforts to reduce costs, promised as a buyer product of the spinoff and reduce incentive accruals at lower salary and employee benefits costs even further. As a result, our efficiency ratio improved from 63.6% last quarter to 39.4% this quarter. It's worth noting here that our plan is to drop below 55% efficiency ratio for the year 2004.

As the quality statistics remain strong and fairly consistent with past quarters, non-performing loans were at 59 basis points of total loans and net charge off's at 40 basis points to average loans. The allowance at year-end reflects a steady 1.3% of total loans and over 200% coverage of non-performing loans.

Overall, excluding the restructuring charges, the fourth quarter results equate to a return on equity of 15% and a return on assets of 1.1%.

On total year basis, net income for combined F.N.B. was $58.8 million or $1.25 per diluted share. Excluding the previously mentioned restructuring charges and other merger related costs associated with the acquisition of southern and (inaudible) bank and (inaudible) insurance both of Florida, earnings were $93.2 million or $1.99 per diluted share. These earnings for the year were on target with the average of the street's estimates. That about covers the performance for the combined F.N.B. for 2003.

Thank you, Brian. Your report closes another chapter at F.N.B.'s history. I hope the financial historians will look back and conclude that shareholders received a superior return on their investment. In just the past three years, shareholders have realized a 95% increase in stock price. This compares very favorably with those banks across the country in our peer group.

On average, their medium stock price increased only 33%. The total return for F.N.B. shareholders over the same period was as very strong 115%.

Now I'm sure that the number one questions from investors is what will you do for us in the future?

Although the combined F.N.B. results are important, I believe that an examination of our 2003 performance exclusive of Florida will present a clear picture of how F.N.B. will perform in 2004. Brian, please tell us how the northern portion of the company contributed to the success of the combined F.N.B. last year.

As you know, we devoted a majority of our earnings releases discussing the pro forma 2003 financial results of the go forward F.N.B. These results are the basis for my following comments. Fourth quarter net income was $12.6 million or 27 cents per diluted share and delivered a strong return on equity of 21.6% placing F.N.B. in the top (inaudible) of peer performance.

Net income for the year was $55.8 million or $1.19 per diluted share with a return on equity of 20%. The net interest income on a tax equivalent basis was $42.9 million for the fourth quarter, up from $42.1 million in the previous quarter. This 1.8% increase is driven primarily by widening net interest margin from 399 in the third quarter to 405 in the fourth.

In the fourth quarter we were able to lower the cost of deposits and we benefited from a full quarter of the restructuring of the federal home loan bank borrowings. Net interest income for 2003 was a $174.6 million with a net interest margin for the year of 4.21.

Non-interest income for the quarter was $15.8 million compared to $17.6 million in the previous quarter. Seasonally lower fee income from insurance and sales of retail investments, lower gains on the sale of mortgage loans and lower security gains accounted for the decrease.

Non-interest income for the year was $70.2 million representing 29% of total revenue. Total non-interest expense were $35.1 million in the fourth quarter, a decrease of 5.4% from the third quarter.

In addition to the reversal of certain performances accruals, we benefited $1 million from the previously announced cost reductions in the quarter. The efficiency ratio improved as well.

Coming in at 58.9% in the fourth quarter, down from 61.2% in the third quarter. For the year, our expenses totaled $145.8 million with an efficiency ratio of 58.7%. As noted earlier we plan to achieve an efficiency ratio below 55% in 2004.

FNB enjoyed solid credit quality with an allowance for loan offers of helping 1.41% of total loans in the fourth quarter. Non-performing assets were at 69 basis points of total assets and net charge-off at 59 basis points to average loans.

Excluding regency finance, our top performing consumer finance company, the fourth quarter of annualized net charge-off to average loans were 42 basis points.

All in all, FNB delivered solid performance in the fourth quarter and for 2003.

Thanks, Brian. Using that data as a backdrop, let me share this with our callers. In 2004, we expect to outdo last year's pro forma earnings per diluted share by 6 to 10% and over 20% from an annualized third and fourth quarter 2003 run rate.

We predict moderate growth in an established mature market and we expect to provide dividends to our shareholders nearly equal in amount to the dividends they earned from the original combined FNB achieving a pay out ratio of 65 to 75%. This would equate to a dividend yield in the range of 4.5 to 5%.

Accomplishing these objectives, we surely illustrate our continued commitment to increasing shareholder value.

As the operating picture becomes much clearer following the execution of the spinoff, our plan for 2004 calls for EPS in the range of $1.26 to $1.32 per diluted share. This excludes gains from the sale of two branches. This change in guidance has directly and solely related to the change to the effective tax rate for 2004, which was accurately determined after completion of the spinoff of our Florida operation.

Tax estimates made before the spin had anticipated tax at a lower rate. I would like to emphasize that our forecast of pretax earnings have not changed.

We expect our return on equity to be approximately 23% and return on assets to approach 1.3%. So how do we accomplish this?

Well, for the answers I'll turn to Debbie and Gary Richter.

Debbie, why don't you talk about your plans first.

Thank you, Steve. To join our success in 2004, our plan for retail banking and wealth management call for a fine-tuning and improved execution of three basic strategies. Those three strategies are --retention, expansion and attraction.

With respect to retention, our goal is to retain more of our profitable customer base by pro-actively managing our customer relationship. We will do this through refined segmentation of our most profitable customers and by doing stronger banking relationship using targeted tactics such as our new needs based assessment tool.

Our goal is also to continue to expand our existing customer relationship. This will be accomplished by identifying targeted opportunities for additional sales with our present customers. These targeted opportunities will be identified by utilizing our new CRM sales software program, a relatively new customer data-mining tool we recently acquired.

We will continue to attract new business by obtaining additional referrals from internal and external partners as well as existing customers. Additional focus will be applied to the management of our sales pipeline and we will also take advantage of new business opportunities at the local market level. Our success is our front line sales and service staff.

This year, we will invest more in additional product knowledge in sales skill training. Our compensation programs have also been refined to drive performance and we are well aligned with our overall company objectives.

We are confident; these initiatives will assist us in expanding our share quality (inaudible) per customer. These three strategies well executed will not only ensure that we meet our financial goals in retail banking and wealth management, they will also help us continuously improve our overall customer experience.

Gary, I know that you have some compelling reasons why we can expect success in the commercial lending areas, so now I'll turn it over to you.

Thank you, Debbie. In commercial lending, we're offer to our strongest start in the past four years. Our pipeline is strong and growing and the recently announced sale of two major competitors within our primary market gives us further optimism for growth and market share. A soft economy, it certainly doesn't look that way right now, but our current outstanding are already at levels projected them to be for the third quarter 2004. At the current time, I don't see any reason that this trend shouldn't continue.

Our plans for strong commercial loan growth should also help offset the planned reductions in indirect auto and indirect leasing out standings. Strong asset quality has always been a mainstay of our bank.

As a prelude to what we might expect for 2004, the level of commercial loan delinquency especially encourages us in December 2003. It was at its lowest point in the last 18 months. So with an anticipated continuation of our historically strong asset quality, the challenge is, can we grow market share? Well, I feel confident that the answer is yes.

Unlike many of our competitors, w don't have commercial loan sales people, we have strong seasoned lenders who are empower and incented to negotiate price structure and approve the loans and they know their communities and they know their clients. We're already the dominant bank, in our central and western regions and in the Erie market, our northern region, we have moved from the seventh to the third rank in a very shored period of time.

We continue to increase market share in our Ohio as well as Greater Pittsburgh areas. With strong motivated leadership seasoned managers, dedicated staff, a highly visible presence in the market we serve, good asset quality and a low risk balance sheet, I think we're poised to deliver exactly what our shareholders expect. Great value.

Steve?

Thanks, Gary. And thank you, Debbie. All of these elements play an important role in achieving the goals of the new F.N.B. Corporation, but the greatest attribute is the culture of our company. Our leadership will strive to continue to control expenses.

Our 2004 plan calls for a reduction of $10 million, that's a 7% expense reduction from last year. As you've heard, we have solid plans in place to grow quality loans and cost effective deposits 3 to 4% in a mature market. We have a firm foundation in place to begin to capitalize on our dedicated, loyal and very productive staff and realizing deeper penetration into our customer base. Brian, can you translate the business strategies into numbers for us?

Gladly, Steve. We expect to grow our commercial and direct consumer outstanding in the 3 to 5% range. This growth will be mostly funded by a planned reduction in our indirect lending portfolio. On the deposit side, after consideration for the planned reduction of a $40 million high cost non-relationship deposit as well as the disposition of two branches, we expect to grow consumer and business deposits 3%.

Our net interest margin is projected to average a strong 4%, although we anticipate the continued gradual decrease of earning asset yield, we also plan similar pace of reprising of our term deposits. This provides the opportunity to expand our net interest income in the range of 2% and to effective capitalize on the stability of our net interest margin performance over the past quarter. One key assumption in our plans that these rates include a flat market rate interest for 2004.

Our one-year gap is slightly liability-sensitive at 1.9% modeling this position with 100 points immediate increase across the yield curve could result in a decrease of net interest income of 2% or just over 1%-- $2 million or just over 1%. Non-interest income is projected to increase 4% over the last year before giving up effective gains on the sale of portfolio securities.

Two areas of focus, wealth management and insurance sales are planning double digit revenue increases. Although plans to decrease versus last year (inaudible) sale of March has remained the key business segment where we expect to grow our market share. While not an annually recurring item, during 2004 we expect to realize the gain of sale of certain branch locations that should add $4 million to revenues on a pretax basis. This gain equates to 5 cents per diluted share and is not in our EPS guidance. Non-interest expense control will undoubtedly be our greatest achievement in 2004. The team is focused on maintaining the current reduced expense levels throughout the year.

In 2004, we will realize the full benefit of the cost reduction program initiated in 2003. In fact, as of January 1, all the benefits are into place.

And as Pete mentioned, this results in a reduction of year over year non-interest expense of $10 million or 7%. Our efficiency ratio for 2004 will be below 55%, below the 59% ratio we experience in 2003 and better than the performance of our peers who are currently at a median of 58%. As for quality we fully expect to maintain the superior track record we've had over the past two years.

Net chargeoffs to average loans are expected to be in the 50 to 60 basis points range. 40 basis points excluding regency while non-performing assets should continue in the 70 basis points range. Management will continue to evaluate asset quality using modern risk assessment techniques and anticipates maintaining allowance to loans historical levels averaging approximately1.4%. Regency plays an important part in F. N.B.'s overall performance.

As I mentioned, regency is a consumer finance company and a high performer in its field. It has successfully managed net chargeoffs in a tight range of 4 to 4 1/2% annually.

I'll be quick to remind you that regency has been our highest performing ability in the past two years with a net interest margin of 16%, and a return on equity greater that 25%. In 2003, regency return on equity was an impressive 32%. These results were achieved while maintaining allowance to total loans of 4.74%.

Other information that may be useful for analysts to use in developing our forecasting models is an effective tax rate of 31% and total fully diluted shares of approximately $47 million. Steve has set off to a challenging year, but we're confident these are achievable goals.

Thank you, Brian. One final topic but Im sure is of interest to the audience is our appetite for acquisitions. Let me address this by saying that we are seeking to expand organically, as well as through strategic and economically feasible acquisitions.

We will actively consider banks, insurance agencies and consumer finance offices within and continuous too, our current corner foot print. In the process of evaluating these opportunities we will not compromise our initiative to provide higher than normal dividends to our shareholders. Therefore, any acquisitions will have to provide immediate positive cash flows to sustain that position.

So to recap for you, we're looking to achieve EPS in the range of $26 to $32 for the year. We expect the first quarter to come in at 28 cents to 30 cents per diluted share. Well, we've covered a lot of ground. My thanks to the listeners for staying tuned. We trust the presentation has been informative and on point. Now I'll ask the operator to poll the audience for any questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question is coming from David Hanna, please announce your affiliation, and then pose your question.

Good morning, KBW. A couple of questions guys' and. thanks for having the call, it has been very informative. First is, if you give us some color on what may be, what changed with regards to your assumptions about the tax rate, what you were previously assuming. Then I just had one or two quick follow-ups.

Brian, can you take that question?

Sure. One of the biggest changes that occurred, as we looked at the reconciliation was the distribution of assets that occurred between the companies and where they fell. Certain of the assets contained tax beneficial components and were shifted between Florida and PA. The net result is that we were working from in the third quarter historical information of the PA Bank that didn't take those into effect. As we go forward here, they are in our numbers, we do now understand what they are and are able to take some comfort in what that will be going forward.

And the change in the tax rate assumption.?

The amount was from 29% to 31%

OK. Thank you. And if we could -- if you could just give us some color on what you anticipate in terms of tangible capital generation relative to the dividend pay out and return on equity what you would sort of target over the course of the next year in tangible capital.

Our plans certainly calls for the tangible capital to increase as we go forward. The pay out ratio is 65 to 75% will free up a portion of our earnings as you would calculate them up from the EPS.

Sure.

We're also in the process, the only other activity that happens in our capital accounts is we do buy shares in fulfillment of employee benefit needs.

And then just finally on the M&E front, and turn just an update on first, any IRS tax implications related to a transaction where you would not be the surviving entity and then also if you could touch base on a little bit more on asset size, delusion criteria, things of that nature, for different doing deals on your own. Thanks.

Well, David, let me give you here is a backdrop. We spent pretty much of the last six months completing the spin. That's now over, as you know. But going forward, we have no restrictions on our being able to make any acquisitions though that we have restrictions on any combination that we would make with somebody in terms of the merger of equals or even an outright sale.

They worked through out summer, if I could add, Steve. As this was being seen put together, section 355 E of the IRS code is what we were dealing with here. And the restriction is that you can't engage with any partner going forward that you have substantial combination discussions prior to the spinoff date.

So there might be a handful of large companies that would qualify under that list, but by and far, those are few and far between and so we don't feel there would be any restriction out of it.

We do feel that applies more towards the spinoff company than the F.N.B. company are going forward. But, of course, in any transaction, we have to consult our tax advisors to get very clear on that. But we do not see anything that's generally in our way.

OK. Thanks, then just on your own delusion criteria and sort of a sweet spot terms of asset size you might be interested in?

Well, David, in an ideal sweet spot for us is probably on the banking side 250 to maybe on the topside $750 million in assets. You know, if you recall, a couple of years ago, we did a combination with promise our financial which was I think $2 1/2 billion. We want to go slowly.

We have a new team, we have a new company. We have essentially pretty much a new board. Do we want to grow through acquisitions? Yes, we want them to make sense for us strategically, but more importantly we want them to make sense financially. So I would say we're going to look at our sweet spot in about 250 to 750.

Great. Thanks, guys.

Its Mike Rodnick (ph).

Hi, Mike.

One question for you guys.

Go ahead.

On cutting expenses by 7% or $10 million, I may not have heard it, did you detail how you would accomplish that?

I'm sorry. Mike, you break up a little bit.

Sure. On your cutting expenses by 7% or $10 million, did you detail how you would expect to accomplish them?

Well, Mike the good news is, it's not an expected as it's actually been accomplished here by the team. In the third quarter commencement with the spin announcement, significant actions were taken place primarily in the salaries and benefits area.

There were 166 people in the northern region that were cut that benefits began to bleed into the fourth quarter to the tune of about a million dollar and are fully realized as we look forward to the first quarter of 2004.

OK. Thanks very much.

Thank you. Sir, there appear to be no further questions in the queue. Do you have any closing comments you would like to finish with?

Yes, I do, operator. First a sincere thank you for the participation in our call today and for your continued interest in FNB. Don't forget the replays of this call, are available through January 30. You can also access a transcript of today's call on our Web site at www.fnbcorporation.com. Our site is a good source of extensive information about the company that you have invested in.

By the way, as a sight to note, we will be in New York on Monday morning to ring the opening bell at the New York Stock Exchange. If you get a chance watch us on one of the financial news channels between 9:25 and 9:30 a.m. My best regards to all and have a great weekend. Thank you for your participation